FOREIGN DIRECT INVESTMENT, FOREIGN PORTFOLIO INVESTMENT, AND CHANGES IN DOLLAR RUPEE EXCHANGE RATE IN INDIA: A STUDY OF RECENT TRENDS

Foreign investment has been considered to be an important source of investment in developed economies which are deprived of necessary avenues for mobilising funds internally. But, the flow of foreign investment is circumscribed by many factors. Technically speaking, changes in exchange rate influences the flow of foreign investment to a country. Exchange rate movements and FDI inflows in India exhibit a long-run relationship, although short-run causal effects are weak. Johansen test confirms a long-run relationship between the variables. Granger causality results show no strong short-run causal link. The VECM results indicate a significant long-run adjustment mechanism. Exchange rate movements play an important role in shaping foreign direct investment dynamics in the long run. While short-run causal effects are limited, impulse response analysis indicates that exchange rate shocks can temporarily stimulate FDI inflows. Augmented Dickey–Fuller (ADF) test, Johansen Cointegration Test, Impulse Response Function (IRF), Grange Causality Test (GCT), Vector Error Correction Model (VECM), are used in this paper. Keywords: FDI, Net FDI, FPI, Underinvestment, Volatility, Foreign Trade Balance, Exports and Imports, Dollar-Rupee Exchange Rate